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May 17, 2012

3 Steps for Adequately Insuring HNW Clients’ Art Collections

Earlier this month Edward Munch’s “The Scream” sold for $119.9 million, the highest amount ever for a painting sold at auction and only the most recent reminder of the dynamic market in art. The previous record was set only two years ago when Picasso’s “Nude, Green Leaves and Bust” sold for $106.5 million.

While few people possess paintings of such renown, high-net-worth families often amass significant art collections. Fully 64% of families with $5 million or more in investable assets consider themselves to be serious or enthusiastic collectors of fine art, and 43% of them report having collections valued at $1 million or greater, according to recent research by ACE Private Risk Services.

Managing such collections can pose significant challenges. Collectors often happily devote themselves to acquiring the next prized piece, but they may not be as passionate about properly tracking and protecting the entire collection. As the collection grows in size and value, maintaining up-to-date documentation and values becomes increasingly complex. If left unmanaged for long, the insured value of the items can fall far behind the cost of replacing them, exposing the collector to significant financial loss if damage or theft occurs.

Here are three steps to maintaining proper coverage levels on an ongoing basis.

Step 1: Drop the spreadsheet and use a database tool specifically designed for tracking collections.

In ACE’s research, 82% of respondents said they had formalized documentation of all the items in their collection, but experts in the field say the methods that collectors perceive as sufficient often are not. “A number of collectors use programs such as simple spreadsheets to document collections, but this choice often falls far short of task,” says Gerald Escobar, president of Asset Archives, Inc., an Atlanta-based global collections management firm that has a relationship with ACE. By contrast, the online database tool offered by Asset Archives allows collectors to store and manage in real time all pertinent information, including pictures of the items, appraisals, invoices, receipts, artist resumes, and documents pertaining to provenance.

Step 2: Get the right appraisers to determine accurate replacement cost.

To properly insure fine art, you need to know how much it would cost to replace it with a similar piece. We usually recommend getting an expert appraisal for any items potentially worth more than $10,000. Many collectors will already be familiar with qualified appraisers for their art collection. If they aren’t, their insurance agent or insurance carrier should be able to suggest a few.

When hiring an appraiser, make the purpose of the appraisal clear—that it is for insurance purposes and not for tax, loan collateral or other reasons. Agree on the fee in advance. Pricing should be based upon the time involved in the project and never as a fixed percentage of the appraised value given to the items.

Step 3: Update valuations on a regular basis in both the inventory database and the insurance policy.

At least once a year, collectors should review the valuations in their inventory and decide if they need updating. For fine art of significant value, we usually recommend getting an expert appraisal every three to five years. If the collector knows that the appeal of a certain type of art or artist has risen rapidly due to a sudden event, such as the death of an artist, getting an appraisal even sooner would be wise. Companies such as Asset Archives can also help collectors stay on top of price trends in the art market and alert them when jumps in value occur. Additionally, for the years in between appraisals, the collector may want to apply an inflation (or deflation) factor based on his or her knowledge of the market.

In concert with the annual inventory review, the collector should work with his or her insurance agent to match the replacement values in the inventory with the items scheduled on the insurance policy. Perhaps items purchased during the year were never added to the policy; they should be now. Also, if the values in the policy aren’t synchronized with those in the inventory, the collection could become under-insured over time. Policies that are geared specifically for high-net-worth collectors do offer some degree of protection against sudden price appreciation by offering to pay market value up to 50% more than the scheduled amount after a covered loss. But even that buffer can be exceeded in a few short years in a strong market.

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